Household Expenses Becoming Predominant Reasons for Personal Loans
- February 14, 2018
- Posted by: Andrew Rombach
- Category: Personal Loan News
As consumer debt continues to climb, it is not surprising that the latest data shows that personal loans are becoming more and more commonplace overall, accounting for a larger portion of consumer debt.
As of June 30, of this year, total household debt in the United States reached $12.84 trillion according to the Federal Reserve of New York. By the end of the same quarter 2017, personal loans only accounted for $106 billion of that total; however, this is more than double from five years ago.
However, these loans aren’t being taken out for unnecessary lavish vacations or luxury purchases, but rather to cover daily living costs.
Household expenses account for about 34 percent of the reasons for a personal loan; yet, household expenses only account for 19 percent of approved applications for personal loans. Although not proven, it could mean that borrowers are using different reasons when applying for personal loans, only to use the loan to cover household expenses later on.
Debt consolidation continues to be the most popular reason listed on approved applications, accounting for 35 percent of application volume. This shouldn’t be surprising. Personal loans are especially useful for debt consolidation if used correctly, and it is possibly one of the most effective uses for the product.
So why is the personal loan on the rise?
Well, it comes down to availability. In a recent LendEDU article, it was mentioned that fintech lenders are now offering personal loans with competitive rates and different underwriting criteria. Additionally, the lack of collateral requirements is increasing availability.
This could be welcome news for the sub-prime consumer who experiences trouble with credit card debt or additional expenses; however, it also opens up the door for malpractice. Easy access to loan products ushers in new consumers who may not have as much experience with borrowing.
At first glance, it’s easy to think this could lead to a greater default rate and overall reduction in creditworthiness for sub-prime consumers down the road, but the personal loan market expansion might bring in another danger: predatory lending.
There are plenty of personal loan lenders out there, and a few of them try to offer short-term, low-amount loans at high rates and aggressive repayment agreements to low-income and sub-prime consumers. These are viewed as predatory loans, otherwise known as payday loans.
These lenders often bank on catching an inexperienced or desperate consumer in a debt trap, allowing them to make money off of strenuous demands under repayment agreements. Oftentimes, this means recurring interest payments from the borrower in question which is sometimes viewed as a trap.
This practice is viewed negatively, and in response to this danger, the Consumer Financial Protection Bureau recently rolled out regulations in an attempt to curb these practices.
While it is interesting to see that personal loans are growing in market share, there are plenty of repercussions to keep in mind. Greater availability opens up options for the average consumer, but it also opens up options for certain lenders that may not have altruistic intentions.
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